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Macro Monthly: More central banks getting ready to cut rates

6 Jun 2024

Key takeaways

  • Despite inflation no longer surprising on the downside, we expect major central banks to start cutting rates from June.
  • Sticky services inflation, a better growth picture and tight labour markets may affect the pace of cuts…
  • …and there are still risks out there for both growth and inflation.

After seeing markets’ expectations for the timing of the first rate cuts from major central banks fluctuate in Q1, the latest set of policy meetings suggests that we’re back on track for June. Inflation may no longer be surprising on the downside, including in the US where inflation surprised on the upside again in March, but policymakers are satisfied that it has moved to a lower gear in most economies. While the last leg of inflation is proving to be stickier, and it is service inflation fuelling that momentum, policymakers appear to feel that they can move policy rates to be less restrictive soon. 

Balancing act
The inflation-growth balance remains key

For central bankers, balancing the two-sided risks of inflation and growth remains the key challenge, as cutting too soon may stoke inflationary pressures given tight labour markets and result in a policy reversal, while holding rates for a longer period may result in a harder landing. We expect the first rate cuts from the Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of England (BoE) in June. 

Many central banks in Asia are waiting for the Fed to cut

Meanwhile, many central banks in emerging economies, particularly in LatAm and Central and Eastern Europe, have been cutting rates for quite some time. Asia remains an exception, with policy rates mostly on hold, apart from cuts in mainland China and hikes in Taiwan (surprisingly) and Japan, where negative rate policy ended in March. Many central banks in Asia are waiting for the Fed to embark on its easing cycle before taking their first steps. 

Source: Macrobond
Source: Macrobond
Robust data
Global PMIs and industrial production have picked up

There has been broadly good news on the growth front. The PMIs remain robust in both the manufacturing and service sectors, with industrial and trade data showing early signs of recovery, supported by resilient consumer demand. Mainland China is also seeing some signs of bottoming out in its data. We could also be seeing turning points in housing markets – with rising prices leading to an upturn in transactions and eventually construction in 2024. 

Labour market remains tight

The other key area to keep an eye on is the labour market. Overall, labour markets remain tight with firms still hiring and wage growth elevated. That said, there are some signs of softness: quit rates have fallen and the pace of wage growth has also slowed in some markets. Nonetheless, layoffs are low and confidence over job availability is high. 

Source: Macrobond
Source: Macrobond
Risks in play
Policymakers need to be mindful of inflationary risks

That said, policymakers should remain cautious of the risks. Higher interest rates are still feeding into increased consumer delinquencies and business bankruptcies, and the longer that rates stay high, the more strain we might see. Geopolitical risk, be that over supply chains or elections, is likely to keep markets on their toes – with risks of higher inflation from any disruptions to the global economy. Things may be getting brighter, but there are plenty of risks out there. 

Our GDP growth forecasts

We recently lifted our annual average global GDP growth forecast for 2024 from 2.4% to 2.6%, which is also our GDP growth forecast for 2025. The main drivers of the positive revision are the US, where an increase in the supply of workers may continue to support economic momentum in 2024, and India, where PMI manufacturing and services have risen and corporate margins remain higher than the long-term average.

Note: *India data is calendar year forecast here for comparability. Previous forecasts are shown in parenthesis, and are from the Macro Monthly dated 11 January 2024. Green indicates an upward revision, red indicates a downward revision. Source: Bloomberg, HSBC Economics
Source: Bloomberg, HSBC ⬆ Positive surprise – actual is higher than consensus, ⬇ Negative surprise – actual is lower than consensus, ➔ Actual is in line with consensus
Source: Refinitiv Eikon, HSBC

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1. This report is dated as at 13 April 2024.

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